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Killing the Recovery

Tax hikes won't cure an ailing economy.

11:00 PM, Nov 8, 2009 • By IRWIN M. STELZER
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All of that should add up to a decent recovery -- unless.... There is a nagging fear among those who closely watch not only the economy but government policy that these nascent economic forces might be murdered in their cradle by the current administration. Small businessmen I have met with last week tell me they are in a state of paralysis as they watch the debate over the health care "reform" bill wending its way through Congress. Lurking in its 1,502 pages (the senate version) are provisions that will markedly raise their costs, and their personal taxes. So even as business gets better, they won't take on more staff, since they can't figure out just what the costs of doing so will be.

Then there is the turmoil over all aspects of the financial services industries. The bonus brawl is the most widely publicized, with bankers somehow stunned that the public should resent their record takings after being bailed out by the government and, in cases such as Goldman Sachs, continuing to benefit from government guarantees of their debt. More important, the indecision on reform of the banking sector continue to weigh on growth, as banks develop ever more stringent restrictions on credit availability while they wait to see who wins the battle between the Obama White House, which wants to give more power to the Fed, and a Congress, led by Massachusetts congressman Barney Frank, that wants to give the Treasury authority to close down any financial institution it deems unfit.

This is no small matter, as the at least partly non-political Fed is less likely than the completely political Treasury to move against an institution for purely partisan political reasons.

Then there is that old bogey taxes. Economists who have the administration's ear just do not believe that higher marginal tax rates will slow economic growth. They are flirting with such things as a 60% rate on the incremental income of high earners or, in the case of congressmen searching desperately for a way to fund the president's $1 trillion health care plan, a "millionaire's tax" on the order of a 5% surcharge on the taxes of anyone earning that sum. This is in part a reaction to extreme supply-siders who persuaded Republican politicians that any and all tax cuts actually produce more revenue. But it is in part due to a belief that markets don't work the way that traditional economists believe, that money incentives do not drive risk-taking and hard work, and that therefore appropriating a larger portion of national income for the state will not affect the growth rate.

So when deciding which letter of the alphabet seems the more plausible description of the shape of the current recovery, you have to weigh the positive signals from the economy against what some, myself included, believe to be the negative impact of the policy errors already made, with more apparently in store for us.

Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).